The EU Taxonomy and How it Tells Investors What’s “Green”

This week, taxonomies made a considerable splash in the news, and it’s all because the European Commission decided that nuclear energy and natural gas could – in certain circumstances – be considered sustainable. While we are not here to talk about what has ultimately become a very controversial move in discussions about the environment and sustainability, we are here to put a spotlight on how this controversy came to be – namely through their taxonomy tool, the “EU Taxonomy.”

The “EU Taxonomy,” as they have coined it, “establish[es] a list of environmentally sustainable economic activities…to provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable.”

In simple terms, the EU Taxonomy is a tool that classifies economic activities (like investing in wind turbines) into a system that determines if the activity is green or not. The system is based on a set of environmental standards defined by the Commission, and designed by a team of experts in finance, science, taxonomies, and so on. 

The setup

In order to define whether or not an activity is green, it must fall into at least one of the six available categories:

• • • Climate change mitigation
    • Climate change adaptation
    • The sustainable use and protection of water and marine resources
    • The transition to a circular economy
    • Pollution prevention and control
    • The protection and restoration of biodiversity and ecosystems

Each of these categories are considered environmental objectives that align with sustainability goals addressed in the Green New Deal. To meet the criteria, an economic activity must make a significant contribution to at least one of the objectives, and cause no significant harm to the remaining five objectives.

Users of the taxonomy can see how the activity meets the objectives by toggling the subcategory “Substantial contribution criteria” and “Do no significant harm criteria.” Within the latter category, users can also view how the activity applies to even more specific subcategories as seen in the screenshot from the EU Taxonomy Compass. 

In essence, as the user interacts more with the taxonomy, the more specific and clear the requirements get per that activity. 

Users of the taxonomy can see how the activity meets the objectives by toggling the subcategory “Substantial contribution criteria” and “Do no significant harm criteria.” Within the latter category, users can also view how the activity applies to even more specific subcategories as seen in the screenshot. 

In essence, as the user interacts more with the taxonomy, the more specific and clear the requirements get per that activity. 

The benefits of using a taxonomy tool over other methods

Transparency & Quick User Orientation

The EU Taxonomy serves as a starting point for investors to make decisions from an informed, objective perspective. Since the goals are organized into a system of categories and subcategories, it defines a clear set of rules that investors can look into without having to ask too many questions. 

Journalist to the financial services industry James Norris claims that, “simply by defining which activities are green and setting the standards to be met, the EU Taxonomy effectively decides which sectors and companies get green funding, incentivising them to remain on the path to net zero.” 

Often referred to as the “Green Compass,” the taxonomy allows investors to navigate criteria in a more user-friendly way. The taxonomy itself has hundreds upon hundreds of activities that in a normal text-based document a person would not be so keen to read through considering its vast size. Having the same information in a taxonomy format means less work for the investor because it’s less time having to comb through unnecessary text in order to find the one piece of information they are looking for.

The EU Taxonomy provides information quickly and clearly, so that making decisions about investments does not require more than a few clicks in a cleanly mapped out set of standards.

Common Language

Another advantage to a taxonomy tool is that it provides a common language for things that may otherwise have many explanations. Consider the recent EU Taxonomy regulation passed on 2 February about nuclear energy and natural gas. 

The EU Taxonomy classifies activities based on the six main objectives and their subcategories. The same terminology is used across the board to mitigate any confusion one might have when trying to align an activity with the standards. Each activity files under “substantial contribution criteria” and “do no significant harm criteria” so there’s little wiggle room to misinterpret if the activity is green or not. 

With a common terminology, all users of the EU Taxonomy, both for the experts creating it and the investors referencing it, understanding the contents of the taxonomy which is based heavily in law is much easier. Since the categories and language are the same for all activities, the EU Taxonomy serves as a strong comparative tool between different activities. From one activity to the next, the same criteria is defined so that investors can address the information between activities equally.

Addressing climate needs with taxonomies

In business and global organizations, there is a growing popularity for taxonomy tools, and the European Commission is no exception. Taxonomies are championed for their ability to restructure complex (very unstructured) data into rather simplistic looking systems. 

While the taxonomy itself is quite complex, its beauty lies in the fact that it is intuitive and accessible. As in the case of the EU Taxonomy, taxonomy tools help organizations find and make sense of the right information when it is needed in the shortest time possible.

Taxonomy management is of chief importance to any data management infrastructure because it can clean up data and express it so clearly. The PoolParty Semantic Suite has a dedicated taxonomy tool that helps organizations build systems similar to the EU Taxonomy, and with comparable power. 

Some of the world’s finest non-profit organizations are using the PoolParty software to do exactly this, with some already being deeply immersed in the environmental sector like our customer REEEP. 

In more ways than one, taxonomies are helping governments like the EU combat climate issues to reach the targets addressed in environmental reforms.